Equities Start the Week Positively: a Return to Trend Growth, Not a Recession

Global Macro and Stock Markets Analysis

Equity futures start the week positively, with news of easing mobility restrictions across several districts in Beijing and Shanghai supporting risk sentiment, illustrated through strength in travel and luxury sectors.

Thoughts of a slower Fed rate hike glide path continue to send positive reverberations across global stock markets. And the resulting softer US dollar provides a tailwind for most commodity and other risk markets.

But the most significant readthrough during the past week is the markets are now pricing in return to trend growth, not a recession. While the market-implied growth rate is a long way below the pricing at this cycle’s peak in Q2 ’21, it is only a touch lower than what was being priced just before the Covid outbreak.

Today, China’s May manufacturing PMI will likely remain below the 50-mark, demarcating expansion, and contraction. However, such weakness should be shrugged off as economic recovery starts to be priced in.

Oil Fundamental Analysis

Brent breached $121/bbl overnight as Crude prices were supported by news that Covid cases are dropping in China and restrictions are being eased further. Hence the market is in the throws of pricing in some semblance of mobility normality in China’s largest cities.

Expectedly, the EU reportedly disagreed on the proposed embargo on Russian oil over the weekend, but discussions will continue today.

Oil traders view the EU agreement as a bit of red herring, given that individual member states and key corporate buyers in Europe are already phasing out purchases of Russian oil through self sanction. For instance, while Russia is still producing oil, a record amount of output from the Urals is now on the high seas looking for a home.

A unified EU deal may help the political optics. Still, significantly less Russian oil will flow to Europe over the remainder of this year, a comprehensive deal, or no deal.

FOREX Fundamental Analysis

Asia FX

A rally in US equities and waning China pessimism provided a platform for a rally in Asia FX, with the much-beleaguered ringgit trading below 4.37. However, for the USDMYR to challenge the low 4.30s and the rest of Asia FX, including the Yuan, to bounce significantly higher, there may need to be a more comprehensive China economic reopening which will unlock gushers of regional positivity


German inflation again surprised substantially to the upside at 8.7% year-on-year, on the back of higher Spanish CPI earlier Monday. And this drove the EURUSD slightly higher on the day. Indeed, this will put significant pressure on the ECB to consider a 50bp hike in July and remove negative rates in one go.

However, ECB Lane pushed back against 50bp hikes: removing stimulus “should be gradual”, quarter-percentage increases in July and September will be “benchmark pace.”

But this holiday-shortened economic calendar will be packed with important US data releases that will inform the Fed’s near-term growth and labour market outlook heading into the June 15 FOMC meeting. Hence, traders were reluctant to push the envelope above 1.08 just yet.

British Pound

GBP continues to polarise views across the investment community, with a general sense of bearishness seeming an ever-constant reality. BAML is the latest to warn of an “existential” GBP crisis and a perfect storm due to the current account deficit, EU/Northern Ireland, and questions over the BoE’s credibility. This toxic combination of factors could make it increasingly challenging to attract portfolio flows to finance the widening current account deficit. Keeping the GBP soft on the crosses and straight up against the US dollar if US economic data positively surprises this week

Negative Feedback Loop, Oil Off the Lows ,Gold Shines + Friday Forex Follies – G10 and Asia FX

Global Macro and Stock Markets Analysis

Broader indexes are off the lows, but conviction remains near zero. The rebound was primarily due to covering bids by crowded shorts and a slight bounce in higher beta Tech as bond yields fall.

Mounting global recession risk is top-of-mind for markets but as the procession to recession shortens, growth concerns are rising, leaving equities vulnerable to the negative feedback loop.

What would typically be met with a shoulder shrug, incrementally weaker data can now amplify downside move. And with few positive developments of late, the market remains vulnerable to the prevailing narrative, with the negative feedback loop only growing louder in recent sessions.

Oil Fundamental Analysis

China is easing lockdowns and mobility restrictions in Shanghai and considering more widespread easing, leading to higher oil prices. Though Brent is off weekly highs, it is still well-above weekly lows.

The growing threat of disruption to Russian crude exports continues to help oil sentiment, despite opposition to an EU-wide embargo from Hungary and a handful of other EU member states that remain heavily reliant on Russia.

News of unrest in Libya reminds supply-side risks, but Russia remains the focus.

And while more extensive than expected drops in US crude and gasoline inventories initially had a limited impact, this week’s US inventory data still screens bullish for oil.

But if US growth data continues to sour, oil prices could get caught up in the negative stock market feedback loop.

Gold Fundamental Analysis

Gold has turned higher as US yields slip and the US dollar sheds some of its safe-haven appeals due to weaker US growth data.

The dynamic in the gold market has changed for the first time in several months. Bullion prices have begun liberating themselves from the tendency to sell into economic destruction, similar to other commodities, and now appear to be acting as a safe- haven. With gold performing well as equities tumble, bullion could catch a short market by surprise if it can hold this pattern.

Friday’s Forex Follies

The safe-haven dollar is not so safe these days.

The US dollar is weaker as the curve is pricing in fewer hikes, and some are putting higher weight on recession probability.

So, the focus has turned from don’t fight the Fed to a policy mistake with hikes getting priced out along the US curve on poor data and higher recession risks. The Fed is leading the hiking cycle, so USD will also get hit first as hikes are repriced lower.

Rates market Technicals are also playing a role, with 10y yields topping out near 3%. The lower end of the range is now 2.70%, so some in the market think there can be a test of that level on the downside; hence gold has found some lustre.

China stabilizing would be a massive weight off the equity market’s shoulders. A couple of well-positioned areas could see a flip if there starts to be some better news from China.

From the G10 side, AUD has room to move higher if China can stabilize short term (NZD and CAD should benefit).

JPY remains a buy in a recessionary environment, as is CHF on SNB intervention talk. The ECB is raising rates into a perfect storm that will undoubtedly widen periphery spreads, making lower EURCHF screens brighter.

In Asia FX, the periphery would benefit from any easing of China concerns. Hence there has been some selling interest across $Asia pairing longs and initiating some tactical shorts on the China easing impulse. I think the undervalued MYR could be an excellent rally candidate with the BNM already hiking rates. And of course, the travel-sensitive THB is well on its way after the robust trade data, and a bounce in tourism will meld to offer the BoT room to hike rates to ward off imported inflation.

As we suggested on the China reopening bounce, it could turn the tide for the YUAN; it is seemingly doing that as there has been less USD buying the past few sessions while longs have started to give way to a strong domestic equity impulse.

However, the lower move is likely due to reports suggesting members of the Chinese Communist Party should shed overseas assets is likely contributing to the downdraft.

For a look at all of today’s economic events, check out our economic calendar.

Does Tech Provide the Lifeline? China Credit Impulse? Oil Sanctions?

Global Macro and Stock Markets Analysis

US stocks finished higher in choppy trading, buoyed by a tech-name rally as 10-year yields slumped, which provided a relief conduit for growth stocks. Indeed, the tilt to the tape favoured growth over value as UST 10y yields fell.

The FOMC meeting scheduled for May 4 is expected to display a hawkish Fed that remains steadfast in bringing inflation back down to its 2% target; it is debatable how long of a reprieve growth stock will get.

The drawdown in China/Hong Kong continued triggered by ongoing economic weakness in Mainland. It turned contagious, with Covid concerns escalating to fears of a Beijing lockdown that spurred broader de-grossing globally, fueling concerns of global growth slowdown and for further supply-chain snarls to only exacerbate already rampant inflation.

But we have been down this bumpy Covid road many times before, and it is improbable that mainland powers do not have a flood-like policy contingency plan when lockdowns are removed.

In China, the credit impulse has been a good leading indicator of the PMIs. Once again, the PMIs are significantly weaker than implied by the credit impulse. If history is any guide, the PMIs may have a further downside as lockdown will extend through Golden Week but should recover sharply once restrictions are eased.

And while China property could shift out of the short seller’s gaze when lockdowns are eased, the steady drumbeat of online regulation catching up to innovation will continue to be painful.

Oil Fundamental Analysis

Crude prices are down at the start of the week due to concerns around Covid-19 outbreaks in China, leading to a more protracted lockdown. While a quick return of Libyan production also fueled the bears. Libya’s Oil Ministry said that the closed fields, shutting in >500kb/d of production, could reopen within days.

Given Omicron’s less-lethal footprint, traders had expected some easing of lockdowns before the Golden Week. And with this unlikely to happen, traders were then forced to revalue oil prices lower on a more protracted consumption slump than expected. China’s economy was quite normal last year. So, we are set to see abysmal consumption data post the Golden Week.

Still, reports are rampant that the EU will have some form of the Russian oil embargo in its sixth sanctions, according to EU Commission Executive Vice President Valdis Dombrovskis. While the details have yet to be agreed upon, the sanctions could be a gradual phasing-out of Russian oil or tariffs on exports beyond a sure price cap. And this continues to support the downside.

In addition, Macron has been vocal in calling for an escalation of sanctions against Russia, including a ban on oil and coal imports. On the back of a Macron election win, these calls should grow louder despite German reluctance.

Energy inflation hedges continue to dwindle with the CFTC data released on Friday showing that money managers cut their net long US crude futures and options positions by 15,963 contracts to 246,481 on April 19. Cleaner positioning is suitable for oil bulls as it can elevate downside risks

FOREX Fundamental Analysis

Japanese Yen and the BoJ Meeting

The US yields moved lower overnight, undoing much of last week’s move, on risk aversion related to China’s inability to contain covid cases (more lockdowns) and how this will impact global growth. Cross JPY selling was the main driver, with AUDJPY and EURJPY, in particular, getting hit. USDJPY topped out in the early Asian session near 128.80/90 before falling to a low of 127.89.

USDJPY opens today’s Asia session near 128.00/10, and support in USDJPY rests at 127.80/90 (overnight low) and 127.30/40 (200-hour MA). Buying dips remains the preferred way to play the pair despite the recent price action. It is unlikely the Bank of Japan changes tack at its meeting later this and, given next week is Golden Week in Japan, local USD buyers will need to get their USDs in before heading on holiday.

Even after Kuroda seemed to dismiss any chance of intervention with his remarks on Friday evening, the market remains wary of a downside. BOJ options climb steadily as the market adds a risk premium for the upcoming policy meeting. The USDJPY curve is now pricing an 80bp gap move. The market will be looking for any changes to policy rate forward guidance and inflation outlook adjustment in the medium to long term

PBOC Cuts Forex RRR Rate By 1%

The PBoC has cut the Forex RRR rate by 1% to 8%. This is the rate that governs firms foreign exchange reserve requirements, and the last move saw them hike it by 2% to 9% back in December 2021.

I think the PBOC FX RRR rate cut is a reaction o the increased volatility and the pace of the weakness. And I suspect the PBOC is still okay with a weaker CNH/CNY, but the FX RRR cut could put a lid on USDCNH speculative topside fervor for now, and we could trade within current levels for a bit.

Malaysian Ringgit

And easing of topside USDCNH momentum due to the PBoC RRR FX cut and a softening of US 10 y UST yields should offer the beleaguered MYR some relief today. By no means do I suggest donning the rally caps just yet, as we have a pregnant hawkish FOMC meeting lying in wait for any USD bears on the first week of May

Thai Baht

USDTHB spot is now trading at 33.10, near the highest level since mid-2017. The consensus view is that this is a combination of general risk-off sentiment, yield differentials, and glum China covid lockdown outlook (and the associated impact of the Tourism sector) weighing on THB. Hard to disagree.

But there were also $425 mn of dividend outflows last week. THB is most sensitive to periods when dividend flows are more considerable than $350 mn. Thailand companies will pay around $1.5 bn of dividends to non-residents in April-May this year. (That’s in the price now) I think THB longs as a tourism recovery play are getting close and would look to cross it with local low yielder TWD as opposed to typical funders like JPY or EUR a

Turnaround Tuesday

During periods of market fear, there is a typical inter-week pattern that stock markets often follow. Markets do not always follow this pattern, but they do follow it a surprising proportion of the time.

The most reliable part of this pattern is “Turnaround Tuesday.” Indeed, stocks tend to rip higher on Tuesday if they sold off the Thursday, Friday, and Monday before. It is a simple human pattern because when the news appears bad, traders get nervous into the weekend and sell some of their holdings on Friday. Then they read all kinds of adverse media reports about China’s lockdown, which scares them to sell more on Monday.

Investor selling pulls in momentum traders who go short on Monday and adds to the selling pressure. The shorts get squeezed into the Monday close, which triggers Turnaround Tuesday. Then, Tuesday comes, and there is nobody left to sell so short covering set in, and stocks go up.

For a look at all of today’s economic events, check out our economic calendar.